Getting Government Out of Your Home

Question: Should the US follow the lead of countries like Canada and Denmark by discouraging mortgages with less than 20% down payments? (Scott Sumner, Money Illusion)

John Allison: Well, it should be noted that the reason we had the low down payments was because of government policy. It was a very strong government policy to increase the home-ownership rate above the national market rate. That was specifically executed through Freddie Mac and Fannie Mae, who were very dominant in the affordable housing, now sub-prime market is being executed today by the FHA. So what we really need to do is get the government out of the home lending business, let home lending go back to traditional banks like it was in the savings and loan industry years ago before the industry was destroyed by hyper inflation and high interest rates and that would impose a discipline. I don’t think a government should set minimum down payments, on the other hand, they shouldn’t encourage no down payments and low down payments, which is really what they have been doing.

Question: What was responsible for BB&T’s relative success and why weren’t other banks so fortunate?

John Allison: Well, BB&T certainly, we’ve had our challenges and we always have made mistakes, but we have done much better than other financial institutions and I primarily think it’s because of the value system we have at BB&T. We’ve had some good strategies and good execution, but they are very secondary to the fact that we were very much a principal driven organization. We’ve had a very strong culture around ethics and values for a long period of time and we’ve reinforced that over and over again. And that value system is based on rationality, which demands honesty, demands integrity, demands a long-term perspective on your business. And it’s caused us to do some things like refusing to make loans where eminent domain was used to take property from one individual to another individual.

Interestingly enough, our value system kept us from making the negative amortization or what are the pick-a-payment mortgages. I remember pick-a-payment mortgages where somebody buys a house and their interest is $1,000 a month, but they only pay $500 a month. We chose not to do those kind of mortgages, not over some grand insight, because at the time,  you could sell them in the secondary market, but because one of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. We expect to make a profit doing it, but we don’t consciously want to ever do anything that’s bad for our clients. We knew real estate markets wouldn’t appreciate a 10% a year forever, we didn’t except them to depreciate like they had, but we knew that people would be taking an inordinate risk with those pick-a-payment mortgages and we chose not to do them over ethics, not over economics. So BB&T’s strength, I believe, has been its value system.

Question: What role did lax mortgage regulation have in the crisis?

John Allison: I think lax regulation played very little rule, I think it was incentive, the government was trying to raise the home-ownership rate above the national market rate. It was a stated objective of the Clinton administration, a stated objective of the Bush administration, they were pushing affordable housing, i.e.: sub-prime lending. It was a government policy. So it wasn’t just the, it wasn’t a lax regulation, it was a goal to make more risky home mortgages, they thought it was a good thing. So it’s ironic that a lot of the same people now that are criticizing the industry, like Barney Frank and Chris Dodd were the people that were most supportive of affordable housing programs. Yes, market participants made mistakes, but in the context of a government stated goal of raising home-ownership above the national market rate, i.e.: a goal supporting sub-prime lending.

The collapse of the housing market was the result of a government-led charge to increase the American home-ownership rate.

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